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Netflix Sings the Blu-ray Blues

Availability for high-def flicks on Netflix is limited.

Netflix(NASDAQ:NFLX) is taking some heat over availability of its flicks in the Blu-ray format.

CNET's Greg Sandoval took a look at a colleague's queue, only to find "Long Wait" as the expected availability on recent releases like The Dark Knight and Wall-E. Adding insult to injury, subscribers pay $1 more for access to Blu-ray optical discs.

It's easy to see why Netflix charges more for Blu-ray. The high-def optical discs do cost more to acquire. The high costs coupled with the nature of new releases deteriorating quickly in popularity against the backdrop of waning subscriber growth justifies a guarded approach in the number of Blu-ray copies that the company orders.

I saw the writing on the wall two months ago, after too many of my queue-topping new Blu-ray releases got slapped with the dreaded "Long Wait" label. I downgraded back to standard DVDs, and I haven't had much of a problem since.

Once Sony's (NYSE:SNE) Blu-ray platform conquered HD-DVD as the high-def format of choice, it seemed as if the end of the format war would be a godsend to the rental industry. Netflix and chains like Blockbuster(NYSE:BBI) began dedicating more room to Blu-ray releases. However, even though prices have fallen on Blu-ray players -- and even on Sony's Blu-ray compatible PS3 video game consoles -- it will be several years before most consumers make the switch. DVD players are even cheaper and far more ubiquitous.

Worse yet, by charging a premium for a less fulfilling member experience, Netflix risks damaging its brand and its historically high customer satisfaction ratings.

There's an untold asterisk to Sandoval's story, though. His colleague claims to go through 20 movies a month. If he is part of the most popular Netflix plan, charging $17.99 a month for unlimited three-discs-at-a-time rentals (including Blu-ray access), Netflix is losing money on his subscription in roundtrip shipping and packaging costs alone. The sweet spot for Netflix is a movie buff who only goes through a third as many titles in any given month. In other words, Netflix is better off financially without its hyperactive renters.

Sandoval touches on the practice of throttling at Netflix, which also explains the crummy availability. With few Blu-ray discs to go around, it simply allocates them to its higher-margin subscribers: its least active users. If the folks going through 15-20 flicks a month don't like it, Netflix won't miss them. There are too many line items to pay on every rental -- from mailing costs to studio royalties -- for Netflix to realistically make money with its high-turnover clients. Sandoval should have probably compared his colleague's availability to the queue of a profitable Netflix subscriber. Blu-ray availability will probably still be an issue there, but it shouldn't be quite so severe.

This naturally brings us to digital delivery. Will Netflix ever be able to effectively throttle usage there? It doesn't seem likely, but by offering the service "at no additional cost" certainly opens the door for even wider usage. Netflix may skirt postage and packaging costs on digital streams, but it still has costly bandwidth bills and studio royalties to pay.

Watch Now certainly has Netflix standing out from a la carte digital renters like Apple(NASDAQ:AAPL), Blockbuster, and Amazon.com(NASDAQ:AMZN), but the more popular it gets, the less sustainable its current form may be.

Some items with immediate availability on your Netflix reading queue:

Netflix began charging a dollar more for Blu-ray access two months ago.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He is part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Fool has a disclosure policy.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
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